The latest round of negotiations, launched just a couple of short weeks after CEO Steve Ballmer walked away from buyout talks, has left shareholders in the dark as to what will constitute the final agreement. On Sunday, Microsoft disclosed that it's negotiating a possible transaction with Yahoo! other than an outright acquisition.
While Ballmer's walk-away was reassuring to some fund investors that Microsoft will remain disciplined, others viewed it as the final straw.
Kim Caughey, senior analyst with Fort Pitt Capital Group, wants more details before endorsing Microsoft's latest move. "I supported the outright acquisition of Yahoo! by Microsoft," Caughey says. Fort Pitt owns 325,750 shares of Microsoft.
"Microsoft is an excellent technology company; Yahoo! understands how to build Internet properties that attract and retain" users. By putting them together, "you get a Reese's peanut butter cup," instead of mere chocolate and peanut butter, Caughey says.
Caughey approves of Ballmer's strategy and the way he handled the recent end of buyout negotiations with Yahoo! "I'm very glad he didn't buy Yahoo! at the inflated price. That shows some discipline," she says. "I was very happy that he walked away when he saw he wasn't going to get value from it."
Whereas Caughey liked the idea of a full merger, she has reservations about Microsoft "throwing money at Yahoo! for a joint venture," because the Redmond, Wash., software company would lack control over management, direction and costs. "We're talking billions of dollars here. I want to know how that's going to return money to shareholders," she said. "I'm leaning toward
thinking it could be a bad thing."
If the current negotiations lead to a deal incorporating Yahoo!'s online search advertising, so much the better, providing it helps Microsoft "make a big splash" in that market, says Dan Davidowitz, portfolio manager and analyst at Polen Capital Management. "We don't see a whole lot of downside. There are different levels of upside depending on what kind of transaction takes place," he says. Polen has owned the stock for 14 years, with 1.14 million shares currently.
"As long-term investors, we think Microsoft's plan to become a bigger player in online advertising makes a lot of sense," Davidowitz said. "Yahoo!'s assets hold a lot of value there." A limited transaction "could be beneficial depending on the price that's paid."
Like most institutional investors, Davidowitz views Microsoft stock as inexpensive right now. It is trading at 13 times forward earnings.
Fund analysts are dismayed that the stock has fallen below its pre-buyout talks level, which was well above $32. The stock was down 57 cents, or 1.9%, to $28.89 in recent trading.
Some investors are frustrated with Microsoft's entire foray into the search-advertising market where, faced with the
juggernaut, it has not been able to grow share organically.
Jane Snorek, a portfolio manager at First American Funds, was against the acquisition of Yahoo! when it was proposed in February. But it wasn't until Ballmer walked away from negotiations that she sold most of First American's shares. "I didn't really believe Microsoft walked away, and I was disappointed in the PC
software growth, too," she says.
Snorek believes Microsoft will keep attempting to buy Yahoo! as long as Ballmer is CEO. And she attributes the stock's low multiples to that expectation. "Microsoft stock is never going to move until they buy Yahoo! ... and get some revenue synergies," she says.
Snorek would prefer to see Microsoft focus on growth in its software business. "Why not buy
? Why not do cloud computing like
? There are plenty of opportunities," she says. SAP is a leader in supplying business software to big businesses. Salesforce is the leader in subscription-based software, hosted on the Web.
Fort Pitt's Caughey also expects and hopes a buyout deal will still happen, noting that every property has a price. "Microsoft sorely needs some help in the Internet space," she says.